ECB watch­ing im­pact of neg­a­tive rates on banks

The Pak Banker - - FRONT PAGE -

FRANK­FURT: The Euro­pean Cen­tral Bank is mon­i­tor­ing the risk that neg­a­tive rates will hurt bank prof­itabil­ity while stick­ing to its com­mit­ment to de­liver price sta­bil­ity first, Ex­ec­u­tive Board Mem­ber Benoit Coeure said.

"We are well aware of this is­sue," Coeure said in a speech in Frank­furt on Wed­nes­day. "We are study­ing care­fully the schemes used in other ju­ris­dic­tions to mit­i­gate pos­si­ble ad­verse con­se­quences for the bank lend­ing chan­nel. But I also think we need to qual­ify the nar­ra­tive that banks' chal­lenges flow largely from our mon­e­tary pol­icy." In­vestors have fully priced in a 10 ba­sis-point cut in the de­posit rate to at least mi­nus 0.4 per­cent at the Gov­ern­ing Coun­cil meet­ing on March 10. Coeure's speech is one of the last sched­uled pub­lic ap­pear­ances by an ECB of­fi­cial be­fore that meet­ing, with the cen­tral bank's self-im­posed quiet pe­riod start­ing on Thurs­day.

"Many banks have been able to more than off­set de­clin­ing in­ter­est rev­enues with higher lend­ing vol­umes, lower in­ter­est ex­penses, lower risk pro­vi­sion­ing and cap­i­tal gains," Coeure said. "Those who call for a less ac­com­moda­tive mon­e­tary pol­icy have to ask them­selves what would be the im­pact on banks' lend­ing vol­umes and loan-loss pro­vi­sions if out­put were stag­nant and prices fall­ing." He re­it­er­ated that ul­tra-low rates are jus­ti­fied by slug­gish growth and in­fla­tion. "We face un­cer­tainty about the out­look for the global econ­omy, we face un­cer­tainty about the di­rec­tion of Europe and its re­silience to new shocks -the U.K. ref­er­en­dum, the next wave of mi­gra­tion," Coeure said. The euro area "ur­gently needs higher growth to bring down high un­em­ploy­ment, to delever­age the econ­omy and to raise in­fla­tion back to our price-sta­bil­ity ob­jec­tive."

Coeure is sched­uled to speak later in the day in Brus­sels, though not on mon­e­tary pol­icy. Bank of France Gov­er­nor Fran­cois Villeroy de Gal­hau told the French par­lia­ment in Paris on Wed­nes­day that while the euro area isn't in de­fla­tion, in­fla­tion is too low and the ECB needs "con­ti­nu­ity" in its tar­get.

Con­sumer-price growth has fallen short of the goal of just un­der 2 per­cent since early 2013. The in­fla­tion rate dropped to mi­nus 0.2 per­cent in Fe­bru­ary from a pos­i­tive read­ing of 0.3 per­cent the pre­vi­ous month, ac­cord­ing to data pub­lished Mon­day. The ECB will pub­lish fresh macroe­co­nomic fore­casts on March 10, when it may cut its out­look again.

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